Signs of a Recovery May be Hidden in Charts

By

MICHAEL KAHN

Updated Sept. 20, 2010 12:01 a.m. ET

Order Reprints

Print Article

Text size

A FORGOTTEN GIANT IN THE INDEX world is back. The original formulation of the Commodities Research Bureau index has scored an upside break out and it lends a stiff dose of credibility to strength seen in economically-sensitive areas of the stock market.

Based on 17 commodities markets from soybeans to cotton to platinum, this index used to be the de facto standard for assessing the trends in all nonfinancial markets. However, just over a decade ago, it was reformulated to more closely match the weights of its various components to their importance in the economy. Agricultural weights were reduced and energy weights were increased.

With 28% in energy, 32% agriculture and the rest in livestock, precious metals and industrial metals, it was still a fairly broad representation of the commodities world.

But while the Commodity Index Total Return ETN rallied well from its June low, a long-term chart shows it trading in a one-year range and 43%% below its 2008 peak (see Chart 1). Given the prevailing thoughts on inflation, this makes sense.

Chart 1

But our old friend, the original CRB index, now renamed the Continuous Commodity Index (CCI), has a very different look (see Chart 2). This month, it moved above resistance to resume its long-term bull market. Further, it is only 14% below its 2008 peak.

Chart 2

Why the difference? A key component, gold, is at an all-time high while energy flounders. Cotton, coffee and sugar are all soaring. Corn, wheat and oats all have long-term breakouts. And even orange juice is in a bullish-leaning pause within its own bull market.

What this all means for the stock market is that strength in economically-sensitive areas is justified.

Deere & Co.
(DE), a heavy machinery maker and economically-sensitive stock, is now trading at levels not seen since July 2008. (See Chart 3) Technical indicators such as momentum and net-volume flows are strong. And while we can argue short-term frothiness, the overall trend is bullish.

Chart 3

Railroads, which move commodities around the country, have been strong, too.
Union Pacific
(UNP) is nearly back to its 2008 all-time high. Here, too, technical indicators remain strong and on the charts we can see a technical breakout from a 2010 trading range.

The point is that many cyclical-stock groups are doing quite well and that often presages better times for the economy.

To be sure, this is not a market-wide phenomenon as there are plenty of economically-sensitive stocks that are not doing well. Steel is a good example of a lagging industry within this group. Air-freight giant
FedEx
(FDX) released a rather dour outlook recently and aluminum maker
Alcoa
(AA) continues to trade at depressed levels.

On Monday, paper and packaging stocks such as
International Paper
(IP) were smacked lower by a
Goldman Sachs
(GS) report saying customers would not accept higher-product prices. Lack of pricing power, of course, is a negative for any industry.

Although there is disagreement within these groups, strength in at least a portion of the economically-sensitive areas of the stock market is a positive for the market overall.

But unless the bulk of these stocks start to pick up we cannot conclude that it is all clear for equity investors. Commodity investors are in a much better place.

Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.